Summers Shoots Down Concerns Over Yuan's Threat To U.S. Dollar's Dominance: 'Is That Really Going To Be A Place Where People ... Want To Hold Reserves?'

Zinger Key Points
  • Larry Summers suggested neither euro nor the yuan could be an alternative to the U.S. dollar as a reserve currency.
  • If the dollar were to lose its dominance, the U.S. should only blame itself, he added.

Although conversations around de-dollarization have gained ground recently, former Treasury Secretary Larry Summers did not seem too concerned during an interview with Bloomberg last week. The economist also shared his thoughts on how the U.S. should deal with China.

What Happened: China is not positioned to provide an alternative reserve currency right now, Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “There has never been a country where there was strong a desire to move as much capital out of the country as we’re seeing in China right now,” he argued. "Is that really going to be a place where people are going to decide they want to hold reserves on a massive scale?"

No Real Alternative: Summers also reflected on potential alternatives. “As long as the U.S. collaborates in its sanctions with Europe — which it did in the Russia case — euros wouldn’t offer an alternative,” the economist said.

The former Treasury Secretary also expressed doubts over the yuan as a possible alternative option. “Anybody looking for political stability, who’s looking for predictability, who’s looking for the nonpartisan, objective adjudication of their claims — are they really going to hold large quantities of assets in RMB?” Summers asked. "I doubt it."
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Self-Inflicted: Summers said if the dollar loses its status as a reserve currency, it could be due to the U.S.'s decline as a world power. 

“It will be because we’ve accumulated a set of untenable debts,” he explained.

The former Treasury official also called on policymakers to focus on strengthening the federal government’s long-term finances and the U.S.' global appeal.

Summers additionally weighed in on the Biden administration’s opposition to the Republicans' demand to tie spending cuts to an increase in the debt ceiling.

"It’s not realistic to think that we’re going to produce any kind of meaningful, broad fiscal reform in the context of a hostage-taking, rushed deadline over the debt limit," he said. 

Dealing With China: Summers said the U.S. should further demonstrate to Beijing that the U.S. isn’t out to "hobble China’s economy in a broad sense."

“The right strategy towards China is to combine deterrence and reassurance,” he said, adding that the U.S. should provide reassurance that "we are prepared to allow them to grow to take a place in the global economy.”

Read Next: Fed Faces Two-Sided Risk With Next Interest Rate Call As Recession Chances Rise: Larry Summers

Photo: Wikimedia Commons

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